In this post, we discuss how you can use the Actuarial Approach and its funded status metric to help you feel more confident about your spending plan in retirement. It is a follow-up to our post of January 11, 2026.
Bottom line: Having a sufficiently high funded status can help you sleep better at night. The question we address in this post is just how high does this target funded status need to be for you—120%, 140% or higher?
Background
Your funded status (the present value of your total assets divided by the present value of your total spending liabilities) is expected to remain unchanged from year to year if all assumptions about future experience, including your budgeted spending, are realized and unchanged. All things being equal, future experience more favorable than assumed will increase your funded status, and future experience less favorable than assumed will decrease your funded status. Therefore, it is important to input a reasonable spending budget (including future taxes and long-term care costs) and use reasonable assumptions about the future when developing your current funded status. We also recommend that you fund your essential expenses with non-risky assets/investments, so that if you do have to decrease spending in the future, it is highly likely that such decreases will involve discretionary spending.
While a current funded status of 100% indicates that you currently have sufficient assets to cover all your anticipated spending liabilities under the current assumptions and spending budget items that you input, these assumptions may turn out to be optimistic or your actual spending in the future may exceed your spending budget for one reason or another. Therefore, it is generally prudent to target an ongoing funded status in excess of 100%. For the purpose of this post, we will call this higher level your target funded status.
Your tolerance for risk determines how much in excess of 100% your target funded status needs to be for you to sleep well at night or to determine when you might feel comfortable increasing your spending budget. If your risk tolerance is relatively low, for example, you may want your target funded status to be sufficiently high so that even really bad future experience will not force you to consider reducing your spending. If your risk tolerance is somewhat higher, you may be ok with a target funded status that might require you to reduce discretionary spending some time in the future in the event of bad future experience.
As discussed in our post of January 11, 2026, the main risks you face in retirement come from events that will either lower your expected assets or increase your expected spending liabilities (i.e., decrease your Funded Status). These risks include:
- Less favorable than assumed investment returns
- Higher that assumed future inflation or cost increases
- Lower than assumed Social Security payments
- Uninsured asset losses
- Unanticipated spending, etc.
Let’s take a look at how you can stress test some of these risks so that you can develop a sufficiently high target funded status that will enable you to sleep well at night.
Higher than assumed inflation or cost increases
You can stress-test this risk by inputting higher assumptions for future rate increases in the Actuarial Financial Planner (AFP) and seeing how such changes affect your funded status. If you do increase the rate of assumed inflation for this test, this change will also increase the cola assumption for your Social Security benefit, so that will mitigate the negative impact of higher inflation to some degree.
With 30-year TIPs ladders currently providing a real rate of return of about 2.4%, we feel that the approximately 2% real rate assumed as part of the set of current default assumptions is already fairly conservative, so instead of assuming higher rates of investment return and inflation, we suggest stress testing certain expenses that you believe may increase at a rate faster than general inflation, such as taxes, health costs, insurance premiums, etc.
We believe increasing a 100% funded status measure determined under the current default assumptions by 10%-15% is probably sufficient to address this risk for most users. If you are more concerned about the impact of inflation on your spending plan, perhaps you should look into increasing your investments in TIPs ladders (and/or deferring commencement of your Social Security benefits, if possible).
Lower than Expected Social Security
The impact of assuming a 20% decrease in Social Security benefits seven years from now is easily calculated in the AFP. The potential impact of this risk will depend on the portion of your total assets you receive from Social Security. For most users, we estimate that your funded status will likely decrease by no more than 4%-8% in the unlikely event that Social Security benefits are decreased across the board by 20% for individuals already eligible for benefits. Of course, future cuts could be more or less than 20%.
Less favorable than assumed investment returns
As another hedge against higher than assumed inflation, it is important to invest some of your assets in risky investments. Expected returns from risky assets are higher than expected returns from non-risky assets over time, but volatility is much greater. Over the past 80 years, there have been three instances when the annual S&P 500 index decreased by more than 35% over one year or more:
- 1973-1974: -42%
- 2008: -38%
- 2000-2002: -40%
So, to stress-test for this risk, let’s assume that your 2026 risky assets will decrease by 40% during 2026. Note that this is for stress-testing purposes. It is not a prediction.
The important take-away from this stress-test is this: The larger the percentage of your total assets (including the present value of Social Security benefits, pension benefits, life annuities, etc.) that is invested in risky assets, the larger will be the beginning of year funded status that will be needed to keep you above 100% at the end of the year if equities decrease by 40% during the year.
For example, if the total present value of your assets is $3 million and the total present value of your risky assets is $1 million (leaving $2 million in non-risky assets), then a 40% drop in your risky assets would reduce your total assets by $400,000 and reduce your Funded Status by 13%. So, you would need to have a beginning of year funded status of at least 115% (100%/.87) to have a Funded Status of 100% at the end of the year under this “black swan” equity investment scenario.
On the other hand, if the total present value of your assets is $3 million and the total present value of your risky assets is $2 million (leaving $1 million in non-risky assets), then a 40% drop in your risky assets would reduce your total assets by $800,000 and reduce your beginning of year funded status by 26%. So, in this case you would need to have a beginning-of-year funded of at least 135% (100%/.74) to have a Funded Status of 100% at the end of the year.
If you don’t want to increase your funding status target for the possibility of less favorable than assumed investment performance, you can always reduce your investments in equities or other risky assets. You can see what will happen to your funded status if you invested all of your assets in non-risky investments by changing the assumed investment return on risky assets (current default of 10% per annum) to the assumed rate on non-risky assets (current default of 5% per annum). The bad news is that this change would reduce your funded status. The good news is that it would likely significantly reduce your funding status target. Another alternative would be to increase your tolerance for risk or hope that future black swan equity experience will not re-occur in the future. Of course, this latter action may not be consistent with your desire to develop a “sleep well at night” funding status target.
Summary
Selecting an appropriate funding standard target that will help you sleep well at night will depend on your tolerance for risk and, for the most part, the percentage of your total assets invested in equities or other risky assets. We also recommend funding your essential expenses with non-risky assets/investments to help you sleep better at night.
If you have a lifetime pension benefit in addition to your Social Security benefit or you have a TIPS ladder and a relatively small investment in equities, a funding status target around 120% might work well for you. If you have a low tolerance for risk and a significant portion of your assets invested in risky investments, you will likely need a higher funding status target to help you sleep well at night in today’s economic environment. We encourage you to use the Actuarial Financial Planer to stress test your planning assumptions.
If you are risk averse and hold a fair amount of your assets in equities, it is not unreasonable for you to have a target funded status near 150%. You want to be able to withstand a black swan event in the equities market and other adverse experience.
Affect your guardrails. What you need to retire.
